No market action: Citi says trading revenue to drop by double digits this quarter

Key Points
  • Citigroup's CFO forecast second-quarter trading revenue to decline by 12 to 13 percent from a year ago.
  • The CFO cited low volatility in bond and equity markets.
A trader, center, wears a Citigroup jacket while working on the floor of the New York Stock Exchange (NYSE) in New York.
Michael Nagle | Bloomberg | Getty Images

Citigroup CFO John Gerspach said trading revenue for the bank would be down by double digits this quarter.

"Volatility has been very low this quarter, which has certainly led to somewhat of a softer trading environment, especially in the fixed income and equity markets," said Gerspach, speaking at Morgan Stanley's Financials Conference in New York today.

"So given that ... slower trading environment, we would expect revenues in our fixed income and equity markets to be down year-over-year in the — I guess I'll call it — the low double digits range, maybe 12 to 13 percent," Gerspach said.

The CFO was questioned on the near-term forecast for the bank's trading revenues as competitors have recently forecast a decline of double digits.

Gerspach said the company is also looking for more efficient ways to meet regulatory requirements and return more capital to shareholders. The bank has $45 billion in excess capital, $29 billion of which is in deferred tax assets that cannot be shed right away, and another $15 billion to $16 billion of which is idle, he said.

"We absolutely have to ... begin to address that (excess capital) on which we're earning nothing," he said.

Citigroup must receive permission from regulators before it can return capital to shareholders through stock repurchases or dividends. The Federal Reserve performs a stress test that determines how the bank can spend its capital. Citigroup is supposed to receive its results in coming weeks.

Those requirements may change, as President Donald Trump's administration plans to scrap regulations placed on big banks during the Great Recession. Gerspach gave a "brief read-through" of the administration's plan, but said Citigroup is waiting for more details.

It was boom times for Citi and the rest of Wall Street in the first quarter as revenue for the bank from fixed-income trading surged 19 percent and equity-trading revenue increased 10 percent in the period. Trump's inauguration and the anticipation of his business-friendly agenda raised expectations for higher rates and more volatility.

Those things haven't really come to pass. The 10-year Treasury yield is lower for 2017 and the CBOE Volatility Index has fallen to new multiyear lows as major equity benchmarks rose to records.

Markets have remained placid this quarter despite key elections in France and the U.K. and some setbacks for Trump's economic agenda, making it hard for Wall Street to make a buck.

"It's sort of in sharp contrast to what we saw last year: a lot of activity with the onset of Brexit and then just leading up to the U.S. primary elections," added Gerspach.

He added that this drop in trading was "just a little bit more than we otherwise would have anticipated given the environment."

The CFO said the bank's efficiency ratio will rise to 59 percent for the quarter and settle in at 58 percent for the full year.

Citigroup shares remained slightly in the green Tuesday despite Gerspach's comments. The stock is up 8.9 percent this year, about even with the market.

— Reuters contributed to this story.